Europe’s Baller Bank Notes Are Fueling Terrorism

When it’s this easy to stuff a briefcase with 1 million euros, you’ve got a problem.

This year, the European Commission opened a new front in the fight against terrorism. Not, as one might expect, on a battlefield or in a particular military hub, but inside the otherwise dour world of central-bank printing presses.

Over the next couple of months, the EU executive body will investigate whether the 500-euro bill, the largest denomination in circulation inside the eurozone, is being used by terrorists in the Middle East to transfer and store wealth. “These notes are in high demand among criminal elements,” the commission reported in February, “due to their high value and low volume.” So what happens if the commission finds a strong terrorist link? The European Central Bank may stop printing those big bills—and eventually even stop honoring them too.

As the threats posed by the Islamic State and other terrorist groups have swelled over recent years, Western security officials have scrambled to find ways to undermine these organizations’ logistical operations. One tactic has been to step up bank regulations in order to stop terrorists from moving money via electronic-payment systems.

So far, so sensible. But the problem is that this approach covers only half (if that) of the terrorist money machine. These days, a significant part of the financial flows supporting terrorism is taking place not within 21st-century cyberfinance, but via the old-fashioned medium of cash, particularly high-denomination notes. Indeed, precisely because of the clampdown on cyberpayments and regulated banks, the importance of paper money may now be rising.

Banning large bank notes, as the European Commission is contemplating, might undermine those flows. Consider it, if you like, as the financial equivalent of throwing sand in the wheels of the transfers: A ban might not stop all the illicit ways in which money is moved around, but it will make the attempts logistically harder.

And when it comes to tangible cash, physical details matter. For instance, to carry the equivalent of $1 million in 500-euro notes, you need only a small carrier bag, according to a 2016 Harvard University study overseen by Standard Chartered’s former head, Peter Sands. To convert that same amount into $100 bills, it takes a simple briefcase, something not terribly difficult to slip into a plane, train, or car. It’s an entirely different beast in the case of packing $1 million in $20 bills: That calls for four briefcases, which aren’t easily carried by hand.

Cash usage is, in fact, rising in many countries, despite all the recent hype about financial technology and sophisticated forms of cyberfinance replacing the need for banks or traditional money. In Japan, for example, the volume of cash circulating is equivalent to 20 percent of GDP, up from 18 percent in 2010. In the United States it stands at 8 percent, having risen over the last six years, while in Switzerland and the eurozone, it tops 10 percent, also slightly higher than in the past. In fact, the only region where cash usage has actually fallen this decade is in the Nordic countries.

While those habits are interesting, it’s the note breakdown that is actually most revealing—and alarming. Insofar as economists have done studies on cash usage, households generally grab low-denomination notes for everyday transactions and rely on bank accounts when handling larger sums. Indeed, it is rare, say, for an ordinary citizen to pay for milk with a $100 bill or throw down a 500-euro note to buy a pair of jeans; in fact, most EU citizens say that they have never even seen a purple 500-euro note.

But if you look at the central-bank statistics, you might think that large notes were everywhere.

According to data assembled by the Bank for International Settlements, for example, nearly 80 percent of U.S. dollars in circulation are found in the form of the $100 bill. Meanwhile, the 500-euro note accounts for almost one-third of euro cash; for the Swiss 1,000-franc bill, the share is 60 percent, and for the 10,000 Japanese yen, it is above 90 percent. This suggests that most of this cash is not being used for normal, everyday transactions. Instead, it is used to stash large volumes of wealth or transfer it, often across borders. U.S. officials, for example, estimate that two-thirds of $100 bank notes are sitting outside American borders, in places such as the Middle East, China, Russia, and Latin America. Meanwhile, European Commission officials think that many of the 500-euro notes are heading to Russia or the Middle East.

The scale of this is hard to track. But to get a clue about what is going on, it is worth taking a look at Luxembourg: Back in 2013 (the last year for which data are available), this tiny country issued some $79 billion worth of 500-euro bills, equal to twice Luxembourg’s GDP.

Of course, some of this movement and storage of cash is undoubtedly legitimate; Greek savers, for example, have been hoarding euros to survive the current crisis. Yet it is becoming increasingly more common that when authorities arrest potential terrorists, they are usually holding large-denomination dollars or euros. In February, for example, the U.S. Drug Enforcement Administration announced the arrest of four drug smugglers who had peddled cocaine imported from Latin America in order to finance weapons for Hezbollah; law enforcement agents found luxury cars lined with large bills.

Still, not everybody likes the idea of a high-denomination ban. Far from it. Inside Europe, the idea horrifies many economists and investors in Germany who fear that it smacks of excessive state interference. In the United States, the concept of holding cash has long been associated with a vision of liberty, privacy, and freedom, leaving libertarians to hate the idea as well.

To be sure, we’ve seen this before. In the 1960s, Washington killed off its $500 note; the British government stopped using its 100-pound note decades ago; and Singapore withdrew its $10,000 note in 2014. The sky did not fall when all these changes occurred; investors adjusted very fast (and remember that this was before anybody could imagine a world where you could pay for groceries, cabs, or anything else with a phone).

In a world of electronic money, central banks now have the means (and justification) to go further. So while Europe is stepping up its anti-terrorism and anti-crime fight, Washington, with its $100 bill, should take careful note. It can either scrap its big bill from circulation, or the Treasury Department and Federal Reserve can continue handing terrorists and drug smugglers an open goal.

A version of this article originally appeared in the March/April issue of FP under the title “Easy Money.”

Illustration by Matthew Hollister

Gillian Tett is U.S. managing editor of the Financial Times and author of The Silo Effect: The Peril of Expertise and the Promise of Breaking Down Barriers.